ROE (Return on Equity)
An accounting profitability ratio whose meaning depends on average equity, leverage, buybacks, and the sign of the equity base.
Return on equity (ROE) is a profitability ratio commonly calculated as net income available to common shareholders divided by average common shareholders' equity. It describes accounting earnings relative to an equity base; it does not by itself measure management quality, cash generation, risk, or shareholder return.
Frequently Asked Questions
What denominator should ROE use?
A common convention is average common shareholders' equity for the period, often the average of beginning and ending balances. Using only ending equity can distort the ratio when equity changes materially because of issuance, buybacks, dividends, losses, acquisitions, or currency effects.
What happens when equity is zero or negative?
ROE is not meaningful when the equity denominator is zero and can be misleading when equity is negative. A positive ratio created by dividing a loss by negative equity does not indicate strong profitability.
Does a high ROE mean management is performing well?
Not necessarily. Leverage, share repurchases, write-downs, accumulated losses, and a small equity base can raise ROE without improving operating economics. Compare margins, asset turnover, leverage, cash flow, capital allocation, and accounting quality.
Can ROE be compared across industries?
Only with care. Capital intensity, regulation, accounting rules, financial leverage, and business models differ. Comparisons are usually more informative among similar companies using consistent periods and definitions.